Business Property Relief (BPR) provides generous exemptions from inheritance tax (IHT).
Relief is given at 100% on the following assets:
- A business or an interest in a business;
- Securities of an unquoted company that either by themselves, or together with any other securities or shares owned by the donor, gave the donor control of the company on all major matters;
- Any unquoted shares in a company; and
- A controlling holding of quoted shares or securities.
Relief is given at 50% on:
- Land, buildings, machinery or plant which, immediately before the gift, was used wholly or mainly in a business carried on by a company of which the donor then had control, or by a partnership of which he was a member; and
- Land, buildings, machinery or plant that is settled property in which the donor has a qualifying interest in possession and which is used wholly or mainly for the purposes carried on by him.
Some suggestions for maximising the benefits of BPR are set out below.
- Property dealing or property development?All trades qualify for BPR other than dealing in shares, securities or land and buildings. There can sometimes be a fine line between what constitutes property development and what constitutes property dealing, particularly where the property might be developed but then let for a period rather than sold, due to the absence of buyers in the market. To maximise the potential to qualify for BPR, there must be a clear intention to develop the property for sale and this should be recorded in minutes and accounts. Any reasons for diverting from the original plan should also be documented.
- CommercialityThe business activity needs to be commercial. Again, it is important to document the actions being taken to try and make a business profitable e.g. producing a business plan. It is hoped HMRC will take a sympathetic approach to loss making businesses in the current recessionary climate.
- Maximise the rate of reliefProperty held outside of a business will, at best, obtain 50% BPR and care must be taken to ensure the qualifying conditions are satisfied. If trading premises are held outside of an incorporated business, and the owner does not control the business, the full value of the property may become exposed to IHT. In this case the owner would either need to include the premises in the company or retain control of the company.
- SharesShares in a holding company have been held not to qualify for BPR where the underlying trading companies were only held as to 20% – 40%, and hence this was not the holding company of a trading group. It may therefore be worthwhile liquidating the holding company and owning the shares in the trading companies direct.
- PartnersIt is generally accepted that partners will not receive BPR for their interests in investment partnerships, even if the underlying assets would qualify if they were held directly by the partner. The benefit of such a structure needs to be considered in view of other taxes and then weighed up against the loss of BPR.
- Services providedRecent cases have highlighted the difficulties with regard to furnished holiday lets. Whilst generous provisions exist for income tax and capital gains tax, HMRC often contend that a furnished holiday let is an investment activity which means no BPR is available. To improve the argument for claiming BPR there should at least be active involvement from the owner or his agent.
It is what is happening in the business at the time of transfer that is important not what has happened in the past and so changes made now could rescue the situation and enable a successful claim to BPR.
Is your will tax efficient?
Consideration should be given to passing down assets that qualify for BPR to the next generation on the first death. A discretionary trust may also be of more benefit than assets passing directly to the surviving spouse.
What will happen to the business after the death of its owner? The decision as to whether the business will be sold or passed to the next generation is likely to dictate how shares should be left under the will and planning now could save you IHT.
If you require any further information on the availability of BPR, then please do contact us.